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A huge misperception exists

06 December 2021 Myra Knoesen

Consumer finances are under strain… with debt levels and COVID-19, we wonder if the worst is yet to come.

FAnews spoke to Johann van Tonder Economist and Researcher of Financial Wellness at Momentum, about debt levels in South Africa.

Many misconceptions

“Misperceptions about the South African consumer sector are rife. Macroeconomic numbers should be treated with care and should not be generalised as if it is applicable to all households. Although macroeconomic numbers are painting pictures such as “South Africans are drowning in debt”, “South Africans don’t save enough”, etc,it is not the whole truth” said van Tonder.

“When analysing the macro-numbers in rand amounts, it helps to associate it with a relatively small number of individuals, e.g., 4-5 million - and not the size of the population which is around 60 million. Put differently, the bulk of household income, consumption expenditure, saving and personal income tax in rand amounts should be associated with around 4-5 million individuals as they earn most of the income, do most of the spending and saving and pay most of the taxes” he emphasised.

“However, when analysing household statistics such as macroeconomic numbers, the Consumer Financial Vulnerability Index (CFVI), consumer debt in arrears, etc., this normally represents the view of all consumers. And because the majority is poor, the numbers will reflect the view of the poor.

When we realise this difference, it is easier to interpret consumer statistics,” added van Tonder.

Outstanding credit owed

“In accordance with the above, the first thing that needs understanding is that almost 90% of the outstanding credit is owed by a small number of people, namely the middle- to high income groups. Likewise, to the above, the overwhelming majority of credit accounts are in the names of lower-income people, which comprise the bulk of the 27.4 million credit active population (this is the latest number according to National Credit Regulator (NCR) numbers in Q4 2020),” said van Tonder.

“In Q4 2020, NCR numbers show that 89% of the credit granted was to individuals earning R15 000 per month and higher – so a small number of people. It also shows that credit growth amounted to 6% from Q4 2019 to Q4 2020, so this growth was mostly driven by a small number of people. Mortgage growth was 43%, thus driven by a small number of people,” he added.

“In Q4 2019, 30% of the credit granted was mortgages. In Q4 2020, 40% of the credit granted was mortgages. Taking it one step further, in Q4 2019, 61% of credit granted was secured and mortgage debt. In Q4 2020, this increased to 71% of credit granted. These numbers show that the composition of new credit granted changed dramatically. This means the less affluent struggled to get new credit (many people did not get unsecured credit), whereas the low interest rates assisted strong mortgage and vehicle purchase growth by a small number of people,” continued van Tonder.

Numbers tell one story, percentages another

When the arrears numbers are analysed, van Tonder said it shows that the number of impaired accounts increased from 21.95 million in Q4 2019 to 23.83 million in Q4 2020. This suggests a worsening of the credit picture. However, as a proportion of total accounts, the arrears number remained constant at around 26%.

“In addition, the number of individuals 3 months and more in arrears with payments, increased from 6.24 million in Q4 2019 to 6.42 million in Q4 2020. However, as a proportion of total credit active individuals, the percentage declined from 24.8% in Q4 2019 to 23.4% in Q4 2020. So, numbers will tell one story and percentages another, which means that it should be interpreted carefully” he emphasised.

“The amount in arrears did, however, increase. Whereas 91.2% of mortgage installments were up to date in Q4 2019, this declined to 90.7% in Q4 2020. For secured credit (mostly vehicles), the decline in the up-to-date proportion was a bit more elevated from 89.1% to 87%. For credit facilities such as overdrafts, credit cards and store cards, the decline was from 83.2% to 81.7%. For unsecured personal loans the decline was from 71.6% to 67.5%. These numbers show that both the higher and lower income are struggling with debt repayments, but in terms of number of individuals it is, as previously pointed out, more pronounced in the lower-income group and in terms of amount it is more pronounced in the middle to high income groups,” continued van Tonder.

“The recent riots, combined with level 4 lockdown, will in all likelihood increase the arrears for especially the low-income groups, but the higher-income groups will also be impacted as the loss of income (from not being able to sell goods or being able to work) will also be affected. What future numbers may show is an increase in arrears in terms of the number of people, but the arrears increase in rand amounts should not be as pronounced. It may be noted, though, that the economy and household finances were on a recovery track until level 4 and the riots,” he added.

Higher financial vulnerability

“The CFVI is a representation of the feeling of all consumers, which, as explained above, is biased towards the view of the majority of individuals, namely the low-income groups,” said van Tonder.

“The Q2 2021 numbers reflect a decline, namely higher financial vulnerability, which was mostly caused by the end to the R350 per month special COVID-19 relief grant. This caused higher income vulnerability, which had a spillover effect to expenditure, saving and debt servicing,” he continued.

Do South Africans save enough?

“Again, a huge misperception exists that South Africans in general don’t save much. This misperception, among others, accrues from wrong interpretation of the net household saving statistics published quarterly by the South African Reserve Bank (SARB). In its June 2021 Quarterly Bulletin, the SARB estimated household net saving in 2020 at 0.7% of their net disposable income, or R19.9 billion. This is somewhat better than in 2019 when households’ outlays exceeded their disposable income by R10.9 billion (-0.4% of net disposable income) and they therefore had to borrow money to fund the shortfall,” said van Tonder.

“However, the net saving of households is BREAK calculated according to the national accounting method as prescribed by the UN, IMF, World Bank, etc. To explain it in an uncomplicated way, it shows what households have left after all their outlays had been deducted from their gross income. Importantly though, according to the national accounting method, households’ contributions to pension funds, retirement annuities, etc. form part of households’ outlays. Households, however, don’t do national accounting. As such, they deem these contributions to retirement funds as part of their saving and don’t see it as part of their outlays – as outlays to them are spending,” added van Tonder.

“The point is, we should consider the accounting method when we talk about household saving – and whether we view it from the national accounting perspective or from the household’s perspective. But this is not all. As explained above, the national account numbers represent the numbers of all South Africans. However, we know South Africa is a country of extremes with huge inequalities in all spheres of life. In terms of income and saving this means that the vast majority of South Africans don’t earn enough money to save. So, the bulk of the net saving comes from a small number of individuals,” he added.

“It is possible, though, to obtain an indication of how much those individuals who earn enough to save, are saving to a long-term goal such as for retirement – from the household’s perspective (and not national accounting). SARS’ tax statistics show that around 5 million individuals save about 13% of their taxable income towards their retirement. This actually is a very good saving rate, and if they all saved from a very early age, they should have a decent income in retirement. So, to answer the question – the way to increase the saving rate is to increase the number of jobs by reducing unemployment. This, however, needs massive economic reforms,” concluded van Tonder.

Editor’s Thoughts:
On a similar note, we know that consumers face financial vulnerability because of too much debt, spending too much and bad financial planning. Financial planners have a key role to play in the future of the country, but is it easier said than done? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected]

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